Does Mortgage Prequalification Affect Your Credit Score?

Do I really need an agreement in principle?

An agreement in principle, also known as a decision in principle, or in some cases, mortgage prequalification, is an initial agreement from a mortgage lender stating how much they would theoretically lend you, should you decide to make a full application with them. You’re not bound to a lender when they provide you with one, and it can be a very beneficial document to have.

First of all, knowing the amount you could borrow will prevent you from setting your sights on a property that you can’t realistically afford. Secondly, with UK estate agents becoming increasingly insistent that buyers provide a decision in principle before they’ll submit your offer to vendors, it will also improve your buying power, once you’ve found the property you love.

Soft vs hard searches – will my credit score be damaged?

So, an agreement in principle is a good idea for hopeful homebuyers, some might say an essential part of the application process. Any reluctance in applying for one is generally down to a concern that credit scores will be affected, causing a knock-on effect of potentially affecting future mortgage applications.

Whilst this is a valid concern, the vast majority of lenders will only do a soft credit search for a decision in principle.  A soft search will not affect your credit record at all, as it doesn’t leave a search footprint (mark on your file).

On the other hand, some lenders will do a hard search at this stage, which will be recorded on your credit file, and whilst it won’t specifically state whether you passed or failed, other lenders can easily surmise the latter if you’re still looking for a willing mortgage lender afterward.

Protecting your credit record

Whilst having a single search recently recorded on your credit record won’t necessarily affect your score, or your ability to get a mortgage with another lender, multiple searches will certainly impact your score and may put off future lenders, as it creates the appearance of desperation.

There are 2 ways you can prevent this from happening:

1. Ask a lender whether they perform a hard or soft check before you agree to proceed with an agreement in principle. Although, bear in mind that this may limit the choice of deals available to you, as you’re eliminating deals from lenders that do a hard search at the first hurdle!
2. Use a whole-of-market broker for guidance. They’re so familiar with lender criteria that they can effectively guess which lenders will approve you before they initiate the decision in principle request, meaning you’re highly unlikely to be rejected.

You’re also unlikely to need to make multiple applications in order to find the best deal, as it’s incredibly unlikely that you’ll find a better deal than the broker will!

Of course, a hard search will be performed when you make the full mortgage application, and whilst this can cause a temporary dip in your score, as soon as you begin to repay the loan in a timely manner, it will bounce back quickly.